Mortgage Prisoners – “Something like that will never happen in Canada”

“How it happens
Here is a fictional but typical example:
A shop owner moved home in 2006, after being offered a mortgage without needing third-party corroboration of their income.
The interest tracked base rate at 1% over bank base rate for five years, after which the rate would revert to the lender’s standard variable rate (SVR).
The lender was happy to lend the money on an “interest-only” basis, where the repayment of the loan would come from future profits in the business, or from an inheritance, or from the sale of the property itself.
With the Bank rate at 5%, the interest stood at 6%, so the householder had to pay £2,000 a month.
In 2007, the Bank rate increased to 5.75%, so repayments increased by a further £250 a month.

Changed circumstances
It is now 2012, the High Street is suffering, and the shop owner’s current income is only £50,000. The property might be worth only £570,000.
From April 2008 until March 2009, his mortgage costs dropped from £2,000 pm to £500 a month as the Bank rate fell to a record low.
All appeared well until the end of the five-year Bank rate tracking product in November 2011.
Now, payments have gone from 1.5% (£500 a month) to the current SVR of 4.25% (£1,416 pm).
Traditionally over the last 25 years or so the answer to this issue of increasing costs would be have been to remortgage to another lender.
However in the current environment things are different, with lenders being much more conservative.
The shop owner would find it difficult to find a new loan on an interest-only basis.
The loan is now at 70% of the value of the home, so almost every lender would require him to take a repayment loan.”

Hat-tip Erebus at VREAA 25 Oct 2012 for this link, and who added:“My co-worker’s response to this: “Something like that will never happen in Canada” “.

Note that in the above example, problems have arisen even with property prices rising.
Yes, there are some differences between UK and Canadian mortgages, but the broad principles of those in debt coming under increasing pressure, as the virtuous cycle turns vicious, are the same.
– vreaa

6 responses to “Mortgage Prisoners – “Something like that will never happen in Canada””

Speaking of Prisoners and, “CouldNeverHappenHere!”… Choosing a WorthyRecipient for this week’s LML CitizenJournoAward is clearly a NoBrainer…

[CBC] – BurnabyTeen arrested after photographing B.C. mall takedown

…”A B.C. teen who aspires to be a journalist says his rights were violated when he was set upon by security guards and then arrested by police after photographing an incident at Metrotown shopping mall in Burnaby, B.C.”…

Interest only will really get you because if value declines, a sale won’t cover the remaining principal. You have to cover the difference, or you are stuck. Lots of people in US are still effectively stuck. You don’t hear about them so much anymore because the story has gotten old, but they are there.